The TIPS Spread: What is it telling us?

by Laura Ehrenberg-Chesler on October 16, 2009

in Bonds,Credit Crisis,Debt,Investment Strategies

TIPS or Treasury Inflation Protected Securities were created to provide investors with a safe security that would offer some protection against inflation.  The principal, and therefore the interest the TIPS pay as applied to the principal, goes up and down as the Consumer Price Index rises or falls.

The flood of liquidity that was injected into the system during the crisis, in addition to the weaker dollar and burgeoning levels of government debt, has caused a great deal of concern among investment professionals and economists, who are forecasting high rates of inflation in the future.

However, the bond market, via the TIPS spread, is not predicting significant inflation over the next five and ten years.  That would be welcome relief to the equity markets and consumers as well.  If the TIPS spread is accurate in its prediction, this will also change the sector focus away from commodities and other “inflation hedges”, at least somewhat. And those investment dollars will be directed to other areas of the market.

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